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11 Nov, 4 tweets, 1 min read
They've already been doing this, for centuries, in all sorts of different regulatory regimes, none of which ever actually banned 100% reserve banking. On the contrary: _minimum_ reserve ratios have been the norm. 1/n
So there is no need for speculation. The market has rendered its verdict, again and again. People have preferred to accept some risk in return for such pecuniary and non-pecuniary benefits as fractional-reserve banks are uniquely able to provide. 2/
This has been so since long before the advent of deposit insurance (which was not widely adopted until the 1980s). The very few prominent 100% banks of the past all benefited from state support--and they still failed! alt-m.org/2018/11/09/fri… 3/
Fractional reserve banks have in contrast been ubiquitous, emerging everywhere except were laws have deliberately rules them out.

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More from @GeorgeSelgin

George Selgin Profile picture
12 Nov
While simply "eliminating" deposit insurance is not a wise prescription for reform, show me an economist who denies that it can encourage excessive risk taking, and has done so in fact in many instances, and I'll show you a poor economist. 1/n
For a survey of the evidence by some very good economists, including @ademirguckunt see this now classic World Bank study: openknowledge.worldbank.org/handle/10986/8…
Deposit insurance began in this country (only the second in the world to adopt it nationally--after Poland if I recall correctly) as a way to shore-up a fundamentally rotten unit banking system. Even then the "moral hazard" problem it posed was well-recognized.
Read 7 tweets
George Selgin Profile picture
12 Nov
@dandolfa How are you defining "public good" here? The fact that something _might_ be supplied by a public authority doesn't itself suffice. What evidence is there that provision of payment services is either non-excludable and non-rivalrous? 1/2
@dandolfa Nor does the Fed have any clear technological advantage I can think of. Yes, it monopolizes the final settlement media. But provided it makes its settlement services available to others, they can (and for the most part already do) handle the "retail" side of payments.
@dandolfa The Fed also monopolizes hand-to-hand currency. But here again, it doesn't follow that it must. Technically, private institutions could supply such media, as they once supplied their own paper banknotes. Today...
Read 16 tweets
George Selgin Profile picture
11 Nov
It's remarkable how even a minor government intervention can sometimes take on a life of its own, feeding on itself in a way that sometimes seems to end only with it swallowing everything in sight!

Consider interest on reserves.
It began, innocently enough, as a proposal for unburdening banks and their customers of the implicit tax mandatory reserve requirements imposed on them, by having the Fed pay interest on required reserves.
Such was the aim of the 2006 "Financial Services Regulatory Relief Act" that first gave the Fed permission to pay interest on reserves (IOR). Banks then held any excess reserves, so it would have involved modest payments on a small fraction of bank assets. congress.gov/bill/109th-con…
Read 9 tweets
George Selgin Profile picture
6 Nov
Thread: It's very important to distinguish the implications of Fed monetization of _outstanding_ Treasury debt from those of Fed monetization of net Treasury security issues.
Monetization of outstanding debt doesn't make much difference, just as @TheStalwart suggests. In the simplest case, financial institutions swap their securities for reserves. The interest burden then becomes a function of the interest paid on reserves.
Generally speaking, there's no fiscal gain from such monetization. The interest rate on reserves may be lower than some longer term Treasury borrowing rates. But because it's an adjustable rate, which the Fed may have to raise to check inflation, it may not be a bargain.
Read 19 tweets
George Selgin Profile picture
22 Oct
The notion that currency or money was always and is today merely a "record keeping device" is highly misleading. Cash transactions are quid-pro-quo exchanges even now, and as such must be distinguished from mere record-keeping, with debts yet to be, or never, settled. 1/n
A settlement medium, like gold coin once upon a time, or Federal Reserve balances today, is categorically distinct from a credit medium. To conflate them is therefore a serious category mistake. Sometimes clever metaphors are too clever by a half! 2/
Of course for certain purposes the error may be harmless. But for others--like trying to come up with a correct understanding of historical exchange systems and the role trust played in them--it's a recipe for misunderstanding.3/
Read 5 tweets
George Selgin Profile picture
21 Oct
Thread: With all due respect to Jo, @Frances_Coppola, and @SteveBakerHW's other critics, and at the risk of being told I also don't understand public finances, I think Steve is right to be concerned.
Steve is hardly alone. In March, Fitch Ratings, noting that the UK's deficit, already at post-1960 record relative to GDP, will "increase to well over 120% of GDP over the next few years," cut its UK credit rating to -AA, a rating it recently re-affirmed. theguardian.com/business/2020/…
Just recently Moody's also downgraded UK debt, to AA3, ft.com/content/117349… Of course, these are hardly "doomsday" ratings; and no one thinks that the UK is about to default. It's even possible that the folks at Moody's and Fitch also don't know their public finances.
Read 10 tweets

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